Risk sharing is an essential part of Islamic finance. The true test of whether a financial action is really Islamic or not is if it has risk sharing. What that means is that a person has the right to profit only when he takes up the burden of bearing risk.
The principle is derived from the fiqh legal maxim:
“الغنم بالغرم”
“(Entitlement to) profit is accompanied by responsibility"
“الغنم بالغرم”
“(Entitlement to) profit is accompanied by responsibility"
What risk sharing does is:
1. Minimizes moral hazard (where someone takes on more risks because he knows someone else will bear the cost of those risks).
2. Links finance to the real world and limits the amount of debt created.
1. Minimizes moral hazard (where someone takes on more risks because he knows someone else will bear the cost of those risks).
2. Links finance to the real world and limits the amount of debt created.
3. Expands the presence of people in economic growth because profits are more effectively shared.
4. Forces Muslims to understand that Allah swt gives Rizq (provision), and they should use and circulate it for good.
4. Forces Muslims to understand that Allah swt gives Rizq (provision), and they should use and circulate it for good.
Don’t confuse risk-sharing with speculation or risk-taking behavior. It is risk-sharing with risk management.
